According to a note from Bank of America, their proprietary Global Equity Risk-Love indicator just surged to the 95th percentile last week.
It’s an indicator that indicator tracks a basket of sentiment drivers including positioning, put-call ratios, investor surveys, price technicals, volatility, spreads, and correlation measures.
Right now, the reading is screaming “Euphoria.”
As you can see in the chart above , we are now well above the red dotted line that typically denotes a contrarian bearish signal.
BofA writes:
“Buoyancy is now evident across nearly every major category – volatility, correlations, spreads, cash allocations, investor surveys, put-call ratios, and technicals.”
When sentiment gets this stretched, markets often need to take a breather. BoA notes that this elevated reading signals markets may be heading into a period of consolidation or a mild correction as traders digest this euphoric positioning. However, the strategists at BoA offer a reality check. While sentiment is frothy, the actual mechanics of the market remain strong. They do not see this as the end of the bull run.
Why? Because aside from the “vibe” (sentiment), the hard data is still supportive:
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Earnings momentum is holding up.
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We are in an ongoing growth upcycle
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Policy settings remain accommodative
A separate note shows that investors are holding one of the lowest proportions of cash in modern history. The recent BofA global fund manager survey showed that “cash levels of 3.7% or lower has occurred 20 times since 2002, & on every occasion stocks fell and Treasuries outperformed in the following 1-3 months:”
These are some big red flags but overall I tend to agree with Bank of America that stocks can continue to rise. When you look at something like the Fear and Greed Index, it’s not elevated
Another favorite of mine is the AAII investor sentiment survey and it shows that 44.4% of investors are bullish, which is off the high of 49.5% from a few weeks ago. That’s still above the historical average of 37.5% but it’s not at ‘euphoric’ levels by any stretch.
S&P 500 futures are up 0.2% today.
This article was written by Adam Button at investinglive.com.